Mendelsohn’s Defense of the Siemens Enforcement Action … A Contrarian View
Mark Mendelsohn (DOJ Deputy Chief, Fraud Section and the DOJ’s FCPA “top cop”)recently defended the 2008 Siemens enforcement action.
Given that Mendelsohn signed the Siemens charging documents and plea agreement, this is a rather unremarkable event and is sort of like me saying I defend the substantive content on this blog.
In any event, and in the interest of sparking thought within the FCPA community, this post takes issue with Mendelsohn’s defense of the Siemens enforcement action.
In an “exclusive interview with the International Bar Association towards the end of 2009,” (see here) Mendelsohn stated that the Siemens enforcement action sends a “very, very strong message” and a “strong deterrent message.”
Among other things, Mendelsohn notes that the overall total of $1.6 billion that Siemens paid to U.S. (DOJ and SEC) and German authorities is “only a fraction of the costs that Siemens incurred as a result of the bribery conduct.” Mendelsohn legitimately notes that Siemens also was subject to a debarment proceeding at the World Bank which required Siemens to pay $100 million to help fight corruption over a period of time. Mendelsohn points out that “the cost of the investigation for the company and the remediation” “probably exceeded the fines that were assessed” and he also cites the “costs of disruption to Siemens’ business,” the replacement of members of Siemens’ board, and the discipline of “lots of sales people.”
Based on the Siemens’ resolution documents, the DOJ’s own statements about the case, and other information in the public domain, I strongly disagree that the Siemens enforcement action sends a “strong deterrent message.”
For starters, since when is the cost of getting caught, the legal and professional fees associated with getting caught, and the remediation associated with getting caught in a bribery scheme “unprecedented in scale and geographic scope” (those are DOJ’s words – not mine) part of the deterrence conversation?
I think every company in the world probably already assumed prior to the Siemens enforcement action that engaging in a bribery scheme “unprecedented in scale and geographic scope” would no doubt entail substantial legal and professional fees, employee terminations and other internal remediation costs upon getting caught. Thus, it is difficult to see how these pieces of the Siemens enforcement action send a “very strong message” or a “deterrent message.”
In a prior post (see here), I took a look at some of the Siemens numbers per the DOJ’s resolution documents. Looking at these numbers again is instructive in light of Mendelsohn’s comments.
The criminal information (see here) describes approximately $1.36 billion in payments Siemens made through various mechanisms, including approximately $555 million paid for unknown purposes (including approximately $341 million in direct payments to business consultants for unknown purposes) and approximately $806 million intended, in whole or in part, as corrupt payments to foreign officials. The criminal information, of course, does not charge Siemens with FCPA antibribery violations, so from the outset it is difficult to see how this case sends a “very strong message” or a “strong deterrent message.”
The Siemens resolution also included charges against certain of Siemens’ subsidiaries.
For instance, Siemens Argentina (see here) agreed to pay a $500,000 fine based on allegations that it made over $31 million in corrupt payments in exchange for favorable business treatment in connection with a $1 billion project in Argentina. Siemens Venezuela (see here) also agreed to pay a $500,000 fine based on allegations of making over $18 million in corrupt payments in exchange for favorable business treatment in connection with two major metropolitan mass transit projects in Venezuela. Likewise, Siemens Bangladesh (see here) agreed to pay a $500,000 fine based on allegations of making over $5 million in corrupt payments in exchange for favorable treatment during the bidding process on a mobile telephone project in Bangladesh?
When a fine amounts to a sliver of the improper payments allegedly made, and a sliver of a sliver of the business allegedly obtained or retained, since when does that send a “very strong message” or a “strong deterrent message?”
Finally, what sort of “very strong message” or “strong deterrent message” is sent when, on the same day a company settles a case for engaging in a bribery scheme “unprecedented in scale and geographic scope” the company also announces that it will be allowed to keep its coveted “responsible contractor” status with the U.S. government. It is further difficult to see the deterrence achieved by the Siemens enforcement action when, in the year since resolution, various U.S. government agencies, including the DOJ, continue to do substantial amounts of business with Siemens and its affiliate companies (see here for a prior post on this subject).
Far from sending a “very strong message” or a “strong deterrent message,” the Siemens enforcement action sends the message that corporate bribery, even if caught, can still result in a net positive.
BAE
In a joint enforcement action that is sure to generate much discussion and controversy, the U.K. Serious Fraud Office (SFO) and the U.S. DOJ announced today resolution of an enforcement action against BAE Systems.
The SFO announced (here) that it has “reached an agreement with BAE systems that the company will plead guilty” to the offense of “failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.”
BAE’s press release (here) notes that “[i]n connection with the sale of a radar system by the Company to Tanzania in 1999, the Company made commission payments to a marketing adviser and failed to accurately record such payments in its accounting records. The Company failed to scrutinise these records adequately to ensure that they were reasonably accurate and permitted them to remain uncorrected. The Company very much regrets and accepts full responsibility for these past shortcomings.”
The SFO and company release note that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”
In a strange turn of events, the SFO also announced (here) that it has withdrawn charges filed last week (see here) against a former agent charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”
The SFO release notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defence contracts.”
So what happened to the charges and allegations involving certain Eastern and Central European governments, including the Czech Republic, Hungary, and Austria?
Good question.
Much like the wave of magician’s wand, they have simply disappeared.
Closer to home, the DOJ announced that it:
“filed a criminal charge (here) in the U.S. District Court for the District of Columbia against BAE Systems plc charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”
The DOJ and BAE release note that the company “will pay a fine of $400 million and make additional commitments concerning its ongoing compliance.”
According to the DOJ release (which is available through the DOJ Office of Public Affairs, but not yet publicly posted on DOJ’s website) “BAE Systems is charged with intentionally failing to put appropriate, anti-bribery preventative measures in place, contrary to the representations it made to the United States government, and then making hundreds of millions of dollars in payments to third parties, while knowing of a high probability that money would be passed on to foreign government decision makers to favor BAE in the award of defense contracts. BAE Systems allegedly failed to disclose these payments to the State Department, as it was required to do so under U.S. laws and regulations in order to get necessary export licenses.”
The bold language above would expose most companies to an FCPA enforcement action, but BAE is no ordinary company. It is a major defense contractor on both sides of the Atlantic (as noted in the criminal information “in 2008, BAE was the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales”).
You can bet that these charges were the subject of much negotiation so as to not upset current or future government contracts as well as foreign policy issues and concerns.
The BAE charges and thus similar to those against Siemens in December 2008. In that case, despite the company engaging in bribery “unprecedented in scale and geographic scope” and despite the company being one in which “bribery was nothing less than standard operating procedure” (both direct DOJ quotes), the company avoided FCPA antibribery charges. (See here for prior posts about Siemens).
These two cases seriously raise the issue of whether certain companies in certain industries are simply “above” the FCPA.
Can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?
Transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today.
The FCPA suffered a black-eye as well and one would be right to ask, “what the heck is going on here!”
Siemens … The Year After
One year ago this week, Siemens agreed to pay $800 million in combined U.S. fines and penalties to settle FCPA charges for a pattern of bribery the Department of Justice (“DOJ”) termed “unprecedented in scale and geographic scope.” (see here).
The charged conduct involved improper payments to obtain or retain (among other business) transportation, telecommunication, energy and health sector contracts in (among other places) Argentina, China, Mexico, Nigeria, Russia, and Venezuela.
According to the DOJ, for much of Siemens’ operations around the world, “bribery was nothing less than standard operating procedure.” Because Siemens (a German-based company) has shares listed on a U.S. stock exchange and because certain of the improper conduct had a U.S. nexus, the company was subject to the FCPA.
The Siemens matter easily remains the largest and most high-profile FCPA matter since the law was enacted in 1977.
Yet, on the same day Siemens agreed to resolve the FCPA matter, the company also announced that a U.S. government agency issued a formal determination declaring Siemens a “responsible contractor.” This designation assisted Siemens in continuing to do business with the U.S. government even though an entity found in violation of the FCPA may be barred from doing business with the federal government under Office of Management and Budget guidelines. (see here).
In the year since resolution of the Siemens FCPA matter, the U.S. government continues to do substantial business with the company it recently charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”
This U.S. government business has helped Siemens outperform its competitors in a difficult recessionary environment and much of the company’s recent success is the direct result of government stimulus programs around the world.
Reacting to these government stimulus programs, Siemens executives stated that the company was in “an excellent position to generate additional business.” In June 2009, Siemens issued a press release noting that “the shares of the stimulus program that Siemens can address are the largest in the U.S.” (see here). Siemens’ executives proclaimed that the government stimulus programs should have a “stabilizing effect on our business.”
On such “stabilizing effect” on Siemens’ business has been the American Recovery and Reinvestment Act, the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009 to stimulate the American economy.
According to Recovery.gov (see here) (a U.S. government website designed “to allow taxpayers to see precisely what entities receive Recovery money ..”), Siemens’ business units have already been awarded several dozen contracts funded by U.S. taxpayer stimulus dollars. These contracts have been awarded by the following government agencies: Department of Defense, Department of the Air Force, Department of the Army, Department of Transportation, Department of Health and Human Services, Department of Energy, Department of Commerce, Department of Housing and Urban Development, and the General Services Administration.
According to Recovery.gov, even the DOJ (i.e. the same government agency that prosecuted Siemens less than 365 days ago for a pattern of bribery the agency termed “unprecedented in scale and geographic scope”) awarded a Siemens business unit a contract funded with stimulus dollars.
It is not just the federal government that continues to do business with Siemens in the immediate aftermath of its unprecedented bribery scandal. Since December 2008, Siemens’ business units have also been awarded: a $135 million service contract with the University of Pennsylvania Health System (see here); a $205 million order for light rail vehicles from the San Diego Metropolitan Transit System (see here); and a $140 million energy contract from the Northern California Power Agency (see here).
Siemens business with the U.S. government (and other units of government) in the immediate aftermath of its unprecedented bribery scandal raises several questions.
Does it even matter, aside from the fines/penalties and associated costs of getting caught, if a company violates the FCPA?
The above information suggests that the answer is no, so the question becomes should it matter? Should U.S. taxpayer dollars be awarded to a company which less than 365 days ago settled a bribery scandal “unprecedented in scale and geographic scope”?
The DOJ frequently speaks about deterrence as being a primary function of FCPA enforcement. But what deterrence is there when an FCPA violator (let alone the most egregious violator in the history of the FCPA) can immediately get U.S. government business, including from the same government agency that prosecuted it for violating the FCPA? Can FCPA enforcement ever be effective if Siemens is the template for future enforcement?
Siemens post-scandal business with the U.S. government also raises the question of whether Siemens secured the contracts at issue in the FCPA enforcement action, not because of the payments, but simply because Siemens offered the best products for the best prices?
Is this the reason the U.S. government continues to do business with Siemens in the immediate aftermath of its unprecedented bribery scandal? If so, what does this say about the rhetoric that accompanies a typical FCPA enforcement action (i.e. the company bribed to get business)?
A Trip Around the World
Grab your bags and your passport, it’s time for a quick trip around the world.
First stop, Germany.
Siemens
In December 2008, Siemens (a global corporation organized under the laws of Germany with shares listed on the New York Stock Exchange since March 2001) agreed to pay $800 million in combined fines and penalties to settle FCPA charges for a pattern of bribery the Department of Justice (“DOJ”) termed “unprecedented in scale and geographic scope.” The combined fines and penalties were easily the largest ever levied against an FCPA violator.
This week, Siemens announced (see here) that it “has come to an agreement about settlements with six further former Board members against whom damages were claimed in connection with past cases of corruption in the company.” See (here) for press coverage.
Next stop, the U.K.
SFO Charges Former DePuy Executive
The U.K.’s Serious Fraud Office (“SFO”) (an enforcement agency similar to the U.S. DOJ), recently announced (see here) that Robert John Dougall, the former Vice President of Market Development of DePuy International Limited was charged with conspiracy for “making corrupt payments and/or giving other inducements to medical professionals working in the Greek public healthcare system.” The SFO has previously indicated (see here) that it seeks to generally model DOJ’s enforcement strategies, and that model now seems to include a broad interpretation of the potential universe of recipients of improper payments (i.e. not just core government officials, but also employees of public healthcare systems). There is greater cooperation between law enforcement agencies around the world in investigating cases of alleged improper payments, a fact highlighted by the SFO release which notes that the case “was referred to the [SFO] by the [DOJ] and accepted in March 2008.” Depuy (see here) is “part of the Johnson & Johnson family of companies.” In February 2007, Johnson & Johnson disclosed a potential FCPA issue and the company’s most recent announcement on the issue is in its November 2009 10-K filing (see here).
Next stop, Australia.
Money to Print Money
The Age of Melbourne has reported (see here) that Securency International (see here) and certain of its executives are being investigated by the Australian Federal Police for alleged breaches of Australia’s criminal code which prohibit payments to foreign government officials to obtain a business advantage. According to the article, Securency (according to its website – a world leader in secure polymer substrate technology and the supplier of a range of unique substrates which are used for the printing of banknotes and other security documents), is also under scrutiny in the U.K., Vietnam, and Nigeria. The article notes that the Securency matter could be Australia’s first prosecution for foreign bribery.
Final stop, the beaches of the Bahamas.
Kozeny Extradition Hearing
While Frederic Bourke (see here) prepares his appeal, Viktor Kozeny, the alleged master-mind of the bribery scheme, continues to enjoy life in the Bahamas as U.S. government attempts at extradition have thus far failed. This week, the U.S. government’s appeal hearing was heard in the Bahamas. See here for press coverage.
Holder to Corrupt Foreign Officials – We Are Coming After Your Money
This weekend, in Doha, Qatar, Attorney General Eric Holder spoke at the Sixth Global Forum on Combating Corruption and Safeguarding Integrity (see here for the full text of his speech).
The forum was a meeting of nations which have signed on to the United Nations Convention Against Corruption (see here).
One of the three “critical steps” Holder spoke of which all member nations should work together to ensure is that “corrupt officials do not retain the illicit proceeds of their corruption.”
Calling such asset recovery a “global imperative,” Holder announced a “redoubled commitment on behalf of the United States Department of Justice to recover” funds obtained by foreign officials through bribery.
As most readers of this blog know, the FCPA only applies to “bribe-givers” and not “bribe-takers.”
Notwithstanding the FCPA’s limitation, in recent years the DOJ has attempted to recover bribe proceeds.
Most notably, in January 2009, in the aftermath of the Siemens enforcement action, the DOJ filed a forfeiture action against bank accounts located in Singapore in the names of Zulfikar Ali, Fazel Selim, and ZASZ Trading and Consulting Pte Ltd. (“ZASZ”) (see here).
According to the DOJ’s complaint (see here), these accounts were used by Siemens and another company to bribe foreign officials in violation of the FCPA, specifically Arafat Rahman (“Koko”), the son of former Bangladeshi Prime Minister Khaleda Zia. The DOJ alleges that the illicit funds in these accounts flowed through U.S. financial institutions thereby subjecting them to U.S. jurisdiction.
In announcing the forfeiture action, a DOJ official said that the action “shows the lengths to which U.S. law enforcement will go to recover the proceeds of foreign corruption …” and that the DOJ will not only prosecute companies and executives who violate the FCPA, but will also use forfeiture laws “to recapture the illicit facilitating payments often used in such schemes.”
As to other means of potentially punishing the “bribe takers,” the FCPA blog recently posted on Presidential Proclamation 7750 (Jan. 2004) (see here).